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There's a crisis at the IRS -- and it's not what you think

Some think Uncle Sam has too much leeway collecting taxes as it is, but the truth is the IRS needs more money to do its job properly.

By Money Staff Apr 29, 2014 12:26PM

This post comes from Janet Novack at partner site Forbes.com.


Forbes.com on MSN MoneyNo, this isn’t an article about how the Internal Revenue Service is a corrupt, political tool, because it’s not -- despite its ham-handed handling of Tea Party and other organizations’ applications for 501(c)(4) tax exemptions and the bonuses it indiscriminately paid to IRS employees behind on their own taxes.


Taxes © Peter Gridley/PhotographerThe IRS is, however, an insular, often tone deaf and sometimes bumbling bureaucracy which is being starved of the resources it needs to do its job.  Since 2010, its Congressional appropriations have fallen 7 percent -- and that’s in nominal dollars, before any adjustment for inflation. During the same period, its appropriations funded workforce has shrunk by 10 percent, with enforcement staff down 15 percent, according to numbers Congress' Government Accountability Office released last week. Meanwhile, the tax agency’s workload has increased with the explosion of identity theft tax refund fraud; a 4 percent growth in returns filed; and new laws to administer, including the Affordable Care Act  (a.k.a. Obamacare).


"The IRS is in crisis and it's not the crisis that everybody thinks it is," IRS Taxpayer Advocate Nina E. Olson said in an interview.  "It's  a crisis of insufficient funding and too much work and  now, insufficient skills in our employees who are not being trained," she added.


Faced with both a budget crunch and embarrassing revelations  about silly spending on conferences, including the production of Star Trek and employee line dancing videos, the IRS slashed training spending in 2013 to 83 percent below its 2010 level.


Even a relatively smooth recent tax return processing season couldn’t mask what the IRS Oversight Board calls, in testimony it is submitting to the Senate this week, "an alarming erosion in both customer service and enforcement that shows no signs of abating."


Consider this: During fiscal 2014, the IRS plans to audit only 4.2 percent of corporations with assets in excess of $10 million, down from 5.6 percent in 2013 and 6.2 percent in 2011.  The individual taxpayer audit rate is expected to sink to just  0.80 percent, down from 0.96  percent in 2013 and 1.1 percent in 2011.   Last year, enforcement revenues from audits dropped $400 million to $9.8 billion, the lowest in a decade, even though there’s no indication that people are cheating less.  (The IRS estimates that in 2006 -- the most recent years it has studied -- the public voluntarily paid 83 percent of what it owed in a timely fashion, with enforcement and late payments bringing the compliance rate up to 85.5 percent.)


Olson, who's known for worrying foremost about deteriorating taxpayer service, now considers enforcement to be at dangerously low levels too. "At some point if you keep stripping from enforcement, the word will get out to people that maybe the IRS hasn't been catching stuff and that in terrorem effect will dissipate. That may take five years to show up," she said.


As for service, the IRS reports that thanks to a lower volume of phone calls this past tax filing season, a higher than expected 73 percent of callers who tried to get through to a human at the IRS were able to do so. The agency attributes the reduced volume to fewer tax changes, but volume may also have been suppressed by headlines warning taxpayers not to even bother calling the IRS.


Anyway, as seasonal phone staffing drops off, the IRS expects service to deteriorate, with an average of around 60 percent  of callers getting through to a human during FY 2014 as a whole.  The same pattern held last year too; during last July, August and September, only 3 out of 10  callers got through to a human being and those who did spent an average of more than half an hour on hold before breaking through.


Another indicator of declining service: the IRS has stopped answering "complex" tax law questions.  Such as? Olson shared a few examples of what’s now on the IRS' too hard for us list: "I deliver pizza for my employer using my car. How can I deduct my car expenses?" and "I received an inheritance. Do I have to report it?"


Even more alarming is the growing time it takes the agency to respond to taxpayers' correspondence -- a crucial service indicator since the IRS conducts 75 percent of its individual audits by mail and sends out millions of additional notices a year questioning some item on a tax return. When taxpayers write back with evidence of why they don't owe more, they rightly expect someone at the agency to read their letter in a timely fashion.  Yet at the end of fiscal 2013, the Oversight Board reports, 53 percent of taxpayer correspondence waiting to be worked was "overage" -- meaning the IRS hadn't responded within 45 days of receipt. That’s up from 28 percent at the end of FY 2010.


Sound bad? Things are likely to get a lot worse at the IRS before they get better. The Obama Administration has asked for a 10.5 percent ($1.2 billion) increase in funding for the agency for 2015,  categorizing most of that as revenue raising initiatives that shouldn't be subject to agreed budget caps.


Good luck getting that through a Republican House more interested in investigating the IRS than funding it.  The nature of what it does and the IRS' own missteps have combined to turn it into arguably the biggest government casualty in the partisan wars.


"What is an historically unpopular agency that  has been seen somewhat skeptically, especially by the Republicans, is now even more so," said Mark W. Everson, who served as IRS Commissioner from 2003 to 2007 under President George W. Bush.  In an interview, he praised new IRS Commissioner John A. Koskinen as a "straight shooter."  But he doesn't see Koskinen as able to change the political dynamic.


"I would tell you this doesn’t get fixed until you have a Republican President. Then the administration can say to (Republicans in) Congress, 'Look, this is our problem. We've got to make this thing work,'" said Everson, now vice-chairman of alliantgroup.


House Republicans have, of course, blocked any funding for the IRS to process or police the new health insurance subsidies (technically, refundable tax credits) that are at the heart of Obamacare.  The new credits are sure to create confusion during the next filing season and the IRS projects that without more funding just 53 percent of callers will be able to get through to a human being in 2015.


Beyond clogged phones, "the affordable care act is so controversial that it's going to wash over the agency just like the 501(c)(4)  stuff did," further eroding the IRS' popular support, Everson predicted.  He worries that declining support for the IRS, combined with falling enforcement, could create a "bad cocktail" that makes younger generations less likely to comply with the tax law.


Olson noted the IRS is now focusing on four priorities: implementing Obamacare and the new Foreign Account Tax Compliance  Act (FATCA); containing the identity theft refund fraud epidemic; and making sure the 2015 filing season goes smoothly. All other information technology projects are on ice, including  a new fraud filter; a system that would allow the IRS to call taxpayers back when it's their turn (the way Amazon customer service does)  rather than placing them on endless hold; and new matching programs to make use of the stockbroker basis reporting Congress mandated back in 2008.


For those coming from a business environment, what the IRS  can't do is simply stunning. For example, about 94 percent of small businesses using accounting software keep their records on Intuit's QuickBooks. But the IRS hasn't been able to afford to give all its own small business auditors Quickbooks, so that they can accept electronic records from those they're auditing. (That's on the 2015  budget wish list too.)


"The IRS will be stretched to the breaking point over the next year and we will see whether by just focusing on those four things it can pull off the 2015 filing season okay," said Olson. "We will either just squeak through, or all chaos will break out."


More from Forbes.com

VIDEO ON MSN MONEY

278Comments
Apr 29, 2014 1:23PM
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"The IRS needs more money to do its job properly"

 

LOL...how about the millions just given away in bonuses to  those tax cheats who work for the IRS, maybe they can use that money.

Apr 29, 2014 1:41PM
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Obviously, this guy doesn't understand government budgets as YEARLY increases are built into them.


So if an automatic increase of 5% is built into the budget, and then they only get a 1% increase, they all scream that they got a 4% cut! No, you got a 1% increase! And let's not forget that 5% increase turns into a 5.25% increase the second year, 2.00 + 5% = 2.10 + 5% = 2.205 <-- See how that works? It grows exponentially.


Cry me a river about how the government needs more of my money when the IRS spends millions of our dollars on a Star Trek themed training video, spends more millions on trips to Las Vegas and gives away thousands of our dollars in "swag bags" and then targets individuals based on their political views!

Apr 29, 2014 1:44PM
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If we had an easy & simple tax code, then we would need much of an IRS.
Apr 29, 2014 1:55PM
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I have an idea. How about we implement a flat tax for everyone. We all pay the same tax percentage. No deductions just a flat tax. No write offs, no exemptions. Everyone pays, then we can reduce the size of the IRS dramatically and everyone wins. We reduce the size of our Government, reduces costs. And everyone has teeth in the game. Sounds pretty reasonable to me.
Apr 29, 2014 1:48PM
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This is satire, right?


What a joke. MSN should be ashamed of themselves for publishing this garbage.

Apr 29, 2014 1:52PM
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GET RID of the IRS and we won't have to worry about them being under funded.  Straight tax where you pay as you spend!  And maybe we could also get rid of the insurance tax called obamacare!  But I doubt it!


Apr 29, 2014 1:48PM
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Pecan Pie apparently doesn't have to deal with the incompetency of the IRS on a daily basis.  Where to begin, I recently filed an amended return for a client when an error was caught, had the taxpayer pay the tax and interest.....only to be rewarded by a $6500 penalty because 'the taxpayer should have known better'....according to Clarissa Jenkins of the IRS on the other end of the phone.  No amount of explanation would convince Clarissa or anyone at the IRS for that matter that punishing someone who corrects a prior return is sending the wrong message.

I've witnessed the attitude at the IRS change over the last 25 years into an adversarial relationship between the IRS & tax preparers.....forgetting that we help them do their job.  I've been spoken to so rudely and treated so poorly by several outstanding revenue officers I had to report them to their managers.  Supposedly they were disciplined, but in reality, I wouldn't be surprised if they got a pat on the back.  The list goes on and on.  According to one retired revenue officer, a large group of the experienced personnel retired beginning in 2009 to 2011, and what we have left are unsupervised & untrained individuals that act as though they're drunk on power.  I don't enjoy what I do anymore because of it.
Apr 29, 2014 2:24PM
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F the IRS...

And to think they just gave themselves big bonuses with our hard-earned tax dollars! Abolish this corrupt arm of the administration!

Apr 29, 2014 2:16PM
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The IRS is the most free-wheeling, unaccountable, neo-Nazi organization in the federal government..... they can do what ever they want to do, and if they unjustly harm you, good luck getting any kind of retribution..... this agency is dangerous.
Apr 29, 2014 1:55PM
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Pecan pie - at the rate our government is going - it needs to be defunded!


Apr 29, 2014 2:40PM
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You just cannot make this stuff up.   Downsize and become efficient.   How much staff was added for the ACA?   Learn to crosstrain like the private sector does.
Apr 29, 2014 2:15PM
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You can come out from under Obama's Desk now ! 
Apr 29, 2014 2:36PM
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The US State Dept can't account for 6 Billion Dollars, and we are supposed to trust these people with even more of our money ???    It's time to retool or abolish the IRS.

Apr 29, 2014 1:50PM
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Then they all should go out and get a second job not the peoples problem!
Apr 29, 2014 3:03PM
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The IRS is as corrupt as Obama.   It is being used for political uses.  The administration still is stone walling on it.   Felonies have been committed.  Taxpayers have been intimidated.  Enemies of Obama have been denied due process.  They have been targeted for special audits and harassment.


Just remember the next time the White House changes hands the same will be done to democrats, after all the IRS employees are fired and we replace them with Republicans, and give them orders to shut down all their favorite liberal organizations.


The corruption in the IRS is so Nixonian it is unbelievable.

Apr 29, 2014 1:56PM
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As is always the case with gov't agencies; what are they doing with the money already provided? Any of us with a modicum of common sense (which is often asking a lot in today's world) couldn't walk into an IRS office and immediately offer constructive, cost-saving, advice about their operations.

The 'bureaucracy' mentioned at the top of the article is a self-perpetuating money pit. But here's an idea. Hire tax collectors and pay them a percentage of the additional funds they legally recover. Then the IRS will have a new problem...what to do with the extra money.
Apr 29, 2014 3:37PM
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NBA:Sterling Banned for life, Called a racist, This is what you call a white wash and, a racist banning.  Al Sharpton ( The bigot, racist ) must be banned from speaking anywhere in public. 
 Louis Farrakhan ( The bigot, racist ) must be banned from speaking anywhere in public.
Jessis Jackson (  The bigot, racist ) must be banned from speaking in public.
Barack Obama ( bigot , racist ) Needs to be impeached and arrested.
Eric Holder ( bigot , racist ) Needs to be fired.
ALL of the racist Rap music we all have been subject to, must be banned in America.      This is only the small list but, must be dealt with immediately, or all charges of racism against Sterling will mean nothing except a bunch of blacks going after a white guy again. Period.
Apr 29, 2014 2:41PM
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sharriannie and I totally agree...$200 million in 2 years for bonuses being paid to IRS workers, many of whom have

bad conduct reports against them and who themselves don't file/pay taxes.  Someone needs to explain to my WHY ANY

government agency gets bonuses simply for doing their job.  All the rest of us go to work, get paid for doing our job, and

we never see a nice big fat bonus for just showing up everyday.  WHY THE GOVERNMENT employees?? And now they

want more money...for what, bigger bonuses??  They have a yearly budget ....do what the rest of us do and live within your

budget, cut out the bonuses, and make everyone do their job. All this would be so simple if they would just do a flat tax on

everything we buy.  At least then EVERYONE would be contributing, not just the middle class and the rich.  Unfortunately,

this will never happen when you have 49% of this country sitting around with their hands out waiting for the nanny gov't to

take care of them.  WHAT A COUNTRY!!  Sadly, the phrase "Common sense" simple no longer exists in our governments'

vocabulary.

Apr 29, 2014 2:38PM
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The IRS needs more money so they can buy more bumper stickers and posters from Democratic candidates to decorate their offices with. They also need more staffing to go after conservative organizations, and more people to man the phone banks during elections to push for Democrats.

They could also use more money for training video productions, and taxpayer-funded junkets. And lets not forget the bonus money they get for doing their job.

They definitely need more money, just like the MSNBC Money staff says. Honest.....

Apr 29, 2014 2:55PM
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I've dealt with the IRS for over 30 years and, until recently they've been mostly fair and impartial - primarily focused on getting the correct answer for given set of facts.  

However, recently,  the culture has quickly evolved from being an agency that tries to "find the right answer under the law" to an agency that is only looking for ways to raise the most money as quick as possible even if they have to take a more radical position to accomplish it.  
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